Gold Price Drop as Central Banks Diversify Assets

Gold prices have dropped for a second day on the market this past Thursday, creating a stir of demand and disappointment with deliberations on monetary policy for central banks diversifying their assets. The price dropped $3 or .3 percent for the December delivery, the most active contract, to $1,190.90 a troy ounce on the Comex division of the New York Mercantile Exchange. Earlier this month the price had sunk down to its lowest in 4-1/2 years at $1,131.85. The sways in price for the rare metal have set a precedent for many countries to invest as a diversification of their assets.

The two-day price drop triggered the interest of Asian buyers who have been sensitive yet observant of the recent activity. The interest peaked when prices came down to $1,175 according to dealers. Director of metals trading at brokerage Vision Financial Markets in Chicago, David Meger, made a statement on the high demand for gold lately. He attributed the physical demand for the rare metal due to a two-week aggressive sell off.

On Wednesday, economists noticed a drop in bullion due to a poll from Switzerland showing weaker support among the Swiss voters for a referendum that would force the central bank to diversify their assets to holding one fifth of their reserves in gold. The initiative is known as “Save Our Swiss Gold” and was organized by the right-wing Swiss People’s Party. They say that measures are to hold 20 percent of the nation’s $550 billion in assets in gold. The SPP have gathered 100,000 signatures in order to hold the referendum, which will provide instructions to the parliament to draft a law governing the holdings of the Swiss National Bank.

The SNB has held 30 percent of its assets in the past with gold, but has now gone down to a low 7.7 percent. Many have come against the referendum, including a member of the Swiss central bank, Fritz Zurbruegg. Mr. Zurbruegg called the initiative “unnecessary and harmful.” He gave a speech in Geneva on Thursday which delved into the reasons as to why. “Price stability and the stability of the Swiss franc are not determined by the share of gold in the SNB’s balance sheet, but by its monetary policy,” he said.

The referendum also called on the SNB to be banned from selling its gold and would give the central bank a five-year time frame to acquire the amount. The amount needed would be 1500 tons by 2019. Zurbruegg also voiced his views against this part of the proposal, as to how it would not properly be utilized as a reserve asset in the face of future economic hardships. “We may even go so far as to say that gold which cannot be sold in a crisis no longer meets the definition of a reserve and thus offers no security at all,” he exclaimed.

As the vote for the referendum approaches, the Swiss Federal Council and Parliament members from both houses have recommended voters to reject the motion. The SPP stands for their initiative and state that the SNB’s policy of capping the franc has left their balance sheet full of euros. Euros, which they believe, have been immensely devalued since the wake of the financial crisis.

The World Gold Council has announced in a recent report, many central banks have increased their reserves in the precious metal. The report points to a range of factors, but mainly diversifying funds away from the U.S. dollar and the backdrop of ongoing tensions in the geopolitical world. Over half the metals added to central bank reserves were acquired by Russia (55 tons of approximately 96 metric tons) in the third quarter, the World Gold Council stated. Bank of Russia Chairwoman, Elvira Nabiullina, announced that the country’s central bank this year had bought up 150 metric tons of gold to date.

One of the main buyers as prices drop is Russia’s central bank, which has been able to diversify its reserves in massive amounts of cheaper priced gold with its income of selling oil, according to William Rhind, CEO of World Gold Trust Services, during CNBC’s Closing Bell. The “elephant in the room” Rhind explained, was how much China was buying, which is only speculated as Beijing has not published these figures. What is known though is that exports to China from Swiss have more than tripled in the last month to 42.5 metric tons.